Are You Carbon Beta Rated?


SEC seal

Yesterday, the Securities and Exchange Commission issued new regulations requiring businesses to disclose information about any risks due to climate change that they may face. As the Washington Post reports:

The commission, in a 3 to 2 vote, decided to require that companies disclose in their public filings the impact of climate change on their businesses -- from new regulations or legislation they may face domestically or abroad to potential changes in economic trends or physical risks to a company.

The biggest climate change risks faced by companies are not shifts in the weather, but arbitrary changes in regulatory schemes. As I noted in my 2008 article for Chief Executive magazine on the topic:

Probably the biggest risk faced by investors is fickle regulators. Agencies and Congress can change the rationing rules at any time. Consider the recent case of EcoSecurities in London, which aimed to create millions of carbon credits to sell in European markets by investing in projects that cut greenhouse gas emissions in developing countries. The United Nations climate change bureaucracy disallowed some of its projects, causing EcoSecurities' share price to crash by 50 percent last November.

The New York-based consultancy Innovest Strategic Value Advisors evaluates the performance of companies with regard to environmental, social and strategic governance issues and their impact on competitiveness, profitability and share price performance. To that end, Innovest has created a proprietary Carbon Beta rating that calculates the net carbon exposure of a firm, taking into consideration current and potential regulatory frameworks faced by companies as they operate around the globe. The Carbon Beta rating also estimates the carbon compliance cost of a company, as a percentage of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). EBITDA is a widely used measure of financial performance that is intended as a measure of the cash generated by the operations of a business. Just like bond ratings, an AAA from Innovest indicates that a company has lower net carbon risk for investors than its same sector peers. According to Innovest president Hewson Baltzell, its analysts look at three different types of risk in a carbon rationed world: (1) direct risks, mainly through carbon caps, (2) indirect risks arising from increased costs of electricity and supplies and (3) market risks stemming from things like changes in consumer behavior, e.g., a shift to smaller, higher mileage automobiles. …

The advent of carbon rationing and permanently higher fuel prices is going to produce far-reaching changes in the way companies do business. In March, Energy and Air Quality Subcommittee member Rep. Mike Doyle told the Capitol Hill newspaper Roll Call, "You are either at the table or on the menu." Mixing his metaphors, Doyle added, "This train is leaving the station." CEOs must now figure out how to make sure that carbon rationing train doesn't run them over.

Here's the question: Are SEC regulations really necessary? If investors actually thought climate change information was relevant to their decisions they could always use Innovest's (or other services') information to evaluate those risks.